ETF vs direct indexing — side by side
| Dimension | ETF | Direct indexing (Arithmos) |
|---|---|---|
| What you own | Shares of a fund | The underlying stocks directly |
| Cost | 3–80 bps annual expense ratio | Flat subscription |
| Tax-loss harvesting | Limited (fund-level) | Yes (stock-level) |
| Customisation | Pick from menu | Free-form prompt |
| Tracking error | Tight | Depends on cap & rounding |
| Liquidity | Single ticker, intra-day | Per-stock, but baskets clear in seconds |
| Best for | Set-and-forget broad exposure | Thematic, ESG-aware, tax-aware customisation |
Pick an ETF if…
- You don't want to think about it ever again.
- Your portfolio is below ~$10k where the fixed cost of stock-level positions starts to bite.
- You're inside a tax-deferred account where stock-level harvesting has no benefit.
Pick direct indexing if…
- You want exposure to a theme no ETF cleanly captures.
- You're in a taxable account and would benefit from systematic loss harvesting.
- You want to exclude specific names or sectors for ESG, employer-stock-overlap, or personal-conviction reasons.
- You want to read every line of the methodology — no black box.
FAQ
How much in tax savings can direct indexing actually generate?
Academic studies (Berkin & Ye 2003, Chaudhuri / Lo / Burnham 2020) find loss-harvesting on a US large-cap mandate generates around 50–150 bps of after-tax alpha per year for high-bracket investors, with the benefit front-loaded in the first 5–10 years.
Can direct indexing replace 100% of my ETF exposure?
It can, but most users keep a broad ETF as a low-friction core and use direct indexing for thematic or tax-aware sleeves. The blend is usually 50/50 to 80/20 ETF/direct.
